FIIs barred from short-term G-sec to check hot money

The Reserve Bank of India (RBI) on Tuesday barred foreign portfolio investors (FPI) from buying government debt with less than one-year maturity (T-bills) to curb hot money flow into the economy, but allowed them to invest in G-sec of residual maturity, i.e. of one year and above.

The central bank also allowed foreign investors to hedge currency risks by using exchange-traded currency futures on the domestic exchanges.

“The modalities for allowing FPIs to hedge currency risk by using exchange-traded currency futures on the domestic exchanges are being finalised in consultation with the Securities and Exchange Board of India,” RBI said in its first bi-monthly monetary policy for the new financial year.

This will help FPIs lock into an interest rate in the country rather than going to an offshore market.

It will, in time, curb activities in the non-deliverable forward (NDF) market, which is opaque and unregulated.

Nomura analyst Aman Mohunta said the ban on FPI in short-term debt would reduce speculative flows into the G-sec market, while allowing foreigners to hedge their currency risk by using the exchange-traded currency futures would help develop the domestic market and reduce activity in the NDF market. “The RBI steps will help develop the onshore currency market,” Mohunta said.

“It is a right step,” said Ashwin Shetty, vice-president, dealings at UAE Exchange. He didn’t agree that allowing FPIs to hedge in the exchange-traded currency market would dent the thriving NDF market. “Only 30 per cent of the NDF market is used for hedging. The rest are speculative trades,” he said.

To enhance hedging facilities for foreign investors in debt instruments, RBI proposes to allow them to hedge coupon receipts falling due in the next 12 months. In case of contracted exposures, RBI has fully restored rebooking of cancelled contracts.

“It is further proposed to allow all resident individuals, firms and companies with actual foreign exchange exposures to book foreign exchange derivative contracts up to $250,000 on declaration, subject to certain conditions,” RBI said.

Shetty said these steps would go a long way in further developing the onshore currency market. “FIIs would also be allowed to hedge their coupon receipts, which will be due over the next 12 months. This is a welcome move,” he said.

The rupee saw a lot of speculative bets in the offshore market last year, leading to strong volatility. The RBI steps will help deepen the domestic currency market further, Shetty said, adding that the relaxations indicated some degree of comfort on the external finance front from RBI’s perspective.

To encourage long-term flows, FPI investment in G-sec shall now be permitted only in dated securities of residual maturity of one year and above, and existing investment in treasury bills will be allowed to taper off on maturity/sale. The overall limit for FPI investment in G-sec will, however, remain unchanged at $30 billion.

IDBI Bank treasury head N S Venkatesh said, “FIIs have invested Rs 15,000 crore in short-term debt this year. T-bills have tenures ranging from one day to 364 days and these investments will now come off. Existing investments will have to be sold off or retired on maturity. RBI wants to ensure that only long-term investors invest in government debt.”

The investment limits vacated at the shorter end would now be available at longer maturities, RBI said. The central bank will continue to ease entry hurdles while reducing risk for foreign investors from volatility in flows.